Book Review: Economics in One Lesson

December 10th, 2010

A basic understanding of economics is vitally important to the task of safeguarding ones wealth – particularly in the current environment. If you’ve spent any amount of time listening to the mainstream economists with all of their hand-waving arguments, circular logic and incorrect forecasts you would certainly be excused for arriving at the complete opposite opinion of the science. But then most economists don’t really spend much time talking about real economics. Instead they direct most of their efforts to purporting a whole raft of economic fallacies. Cutting through these fallacies and recognizing them for what they are – a long term destruction of the average standard of living – is exactly what Henry Hazlitt’s Economics in One Lesson is all about

Although the book runs some two hundred pages, the lesson itself is concise and can be simply summarized: Economics consists not only of looking at the short term effects of policies but the long term consequences as well; their effects must not only be examined with respect to a single group, but on all groups.

This economic analysis is complicated by the fact that the special interests who benefit from one-sided policies are highly motivated to conceal their true impact. They will spend a great deal of time and money spreading one sided arguments and misinformation until the public is either convinced of the benefits or simply gives up trying to understand all of the debates.

Each chapter in the book becomes your practice in applying the lesson to a specific fallacy. You become familiar with recognizing both the seen and unseen consequences of an economic policy. Although originally published in 1946 you will scarcely be aware of the fact that it wasn’t written in reference to our current economic crisis. You will immediately recognize cash for clunkers, quantitative easing, government backed mortgages and student financial aid as just the latest versions of common economic misconceptions.

Using the fallacy of government economic stimulus as an example: How many times are we told by politicians that if the private sector economy is in a recession, then all that is required is for the government to pick up the slack? In other words, a little government spending is all that is required to jump start the economy. To the average person it’s hard to argue with what is immediately seen. Standing before them is a new million dollar building under construction. All of the newly created construction jobs provide tangible proof of the positive effects of government spending. And at the end of the project a new building exists where none had before. For most politicians and economists this is conclusive evidence of successful policy.

But as Hazlitt teaches us in his lesson, it is not enough to consider only the visible effects on a special interest group in evaluating economic policy. The longer term unseen effects on the rest of the population must be considered as well. The key to uncovering the fallacy lies in recognizing the fact that government has no wealth of its own. Every dollar spent by government must come from a dollar in taxation. Even if the government borrows the money first, it must ultimately be paid back through taxation or inflation – understanding that debt paid through inflation is merely a tax on savings.

Once this is understood it becomes clear that the money used to fund the new building came as result of depriving the private sector by an equal amount. Money that would have otherwise been spent by those who had earned it, is now sacrificed to the government stimulus. What is not immediately seen are the private jobs lost as one million dollars of revenue is removed from the private sector economy. What is not seen are all of the appliances, televisions and consumer goods that were not produced as a result of the loss of the private sector capital. Once all impacts of the policy are considered, it becomes clear that government stimulus is merely a diversion of capital from the private sector to the government and does not produce any net economic benefit.

There is nothing new in the current policies, only their names have been changed to benefit a new lobby of special interests. One of the great satisfactions that come from reading Economics in One Lesson is the discovery that real economics makes not only sense – but common sense as well. You will be rewarded with a series of “a-ha” moments in which your suspicions about many policies will be confirmed – only now you will be able to identify exactly where a specific policy argument falls apart.

Hazlitt’s book is akin to revealing the secrets of the magician. Common sense tells us that the woman in the trick isn’t really levitating, but all of our immediate explanations are defeated as the magician passes the ring over her body. It is only after we are shown the hidden support that we understand how the trick is really performed. And once shown, we are never fooled by the trick again as we immediately remember the unseen support that creates the illusion.

Mr. Carter’s ideas about the economy as reflected in his review of this book are the most totally wrong headed free market economics about the “investing” value of the private sector I’ve ever heard. Our system has allowed rich people to horde money and then use tax payer money to pay their bills. It’s reverse socialism benefiting capitalists and hurting workers. Just look at our current wage scale in this country and the distress of the middle class. There has not been any real stimulus and we’re all still in bad shape. Unless the consumer can afford to buy products main street will continue to suffer even as Wall Street rakes it “up” from the rest of us.

I’ll admit right here, I’ve not read the book. However, the problem I keep seeing in free mkt economic analysis works is their age. I believe we are living under a new paradigm. All the classic teaching deals with a closed economy, ie: no overseas outsourcing. Traditionally we are taught ea. nation has a competitive advantage and tariffs and other barriers don’t work, because they weaken the domestic industry by protecting it from foreign competition to the point it can’t compete at all. We’ve had the muscle and guts of the US eviscerated over the past 20 yrs. There is little competitive advantage a nation like the US can create unless it races to the bottom to the level of the developing world. Countries with abundant, cheap, cheap labor, little environmental protection, a weak popular political organization, and a web of entrenched corruption which keeps it all in place.

Look around, the US is heading this way. The current social agenda is not sustainable and the corruption at the highest levels between govt., business and finance are at historical epidemic proportions. I wan to read a book that addresses these facts. Free trade is a fallacy, because the developed nations cannot maintain enough economic advantage to sustain high wage jobs and std. of living under the current system.

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